Modeling Indian Wheat and Rice Sector Policies

This paper serves to disentangle the complex system of Indian food policies, related to wheat and rice procurement, storage, distribution and trade. Using time series for national aggregate data, these policies are econometrically analyzed, next their implications for the markets are assessed and finally their fiscal costs are estimated. The study revealed strong impact of the policy measures on the production, procurement, stocks and trade. We detected several market distortions and mounting fiscal costs.
Wheat and rice supply strongly and significantly responds to the minimum support price (MSP). Wholesale prices at planting or lagged harvest time prices are largely irrelevant for the production. The Food Cooperation of India’s (FCI) procurement volume is driven by the production level and the difference between the MSP and the market price. The signs of the estimated price elasticities of demand are consistent with the theory, however for rice they turned out to be insignificant. The negative income elasticity of rice consumption as well as the downward trend in rice consumption suggest changing habits and the inferior character of rice as a consumption good. The public stock analysis suggests higher storage losses for rice (10%) than for wheat (2%). Strong crowding out effects of the public stocks on private stocks and negative impact of export restrictions on private ending stocks was found. Total exports are highly distorted by the trade regulations, which whipped out the trade response to the price incentives.
Starting from 2006/07, there is a clear upward trend in inflation adjusted costs of operating the public food procurement and distribution system, coming mostly from the rising procurement volume and the MSP. On the other hand, the revenues have declined in real terms, due to lower real central issue prices and only marginal revenues from the domestic sales and exports. As a result, the food subsidy has shown a permanent growth in real terms. The seasonal analysis of the intra-year data revealed strong seasonality of prices and procurement and stock levels, in particular for wheat (less for rice).